Preparing Budgeted Income Statement Of AuStar Gold Limited

Company Background

The purpose of the report is to prepare the budgeted income statement of the ASX listed company that is Austar gold limited. The master budget along with their elements will be explained in the report. These elements of the master budget contribute effectively for preparing the accurate budget. The comparison of the top-down and bottom-up approach has been done which will help in analysing the suitable approach for the company. The changes which are projected in the budgeted income are majorly related to the sales, cost of goods sold and expenses. Further, the changes in the 2018 and 2019 income statement have been discussed.

The company Austar Gold is performing the operation within Australia with the vision of becoming the next mid-tier Australian gold producer. The company majorly emphasis on the acquisition and return to the production of the low entry cost, the idle gold mines at the time of the strong gold prices (AuStar Gold Limited, 2018). Along with this, the strategy majorly includes employing a portfolio approach along with the different assets that are held in the highly significant Eastern Victorian Goldfields. The company started performing their business operations in the year 2003 and have headquarters in Spring Hill, Australia (AuStar Gold Limited, 2018). This has been found that AuStar Gold Limited (ASX: AUL) is rapidly expanding their gold business with an exciting portfolio of the near term development assets that is majorly based on Morning Star Gold Mine in Victoria (ASX, 2018).

In the organisation, the functional division of the company forms the budget that is related to the particular division. The master budget is considered as the sum total of all the divisional budgets that is formed by all the divisions. It majorly includes the financial planning, cash flow forecast and the budgeted profit and loss account along with the balance sheet of the company. The master budget is prepared by the organisation with the help of the different types of elements (Shcherbina and Tamulevi?ien?, 2016). The below given is the discussion of the few important elements that contribute effectively in the preparation of master budget: –

• Sales budget: – This budget is considered as the foundation of the master budget because the estimation of all the procurements, staff requirements and the cost of administration are based on the sales of the company (Cox, 2014). Firstly, the numbers of units which are required to be sold and price per unit are derived. According to this, the value of the sales of the company is supposed to be calculated.

The sales budget is prepared based on the different factors which include: –

1. Estimation of demand in the market
2. Production capacity or an infrastructure facility
3. Analysis of industry
4. Present facility of supply

• Production budget: – This budget is majorly based on the sales budget which shows that it is very essential to maintain the accuracy while preparing the sales budget of the company (Weygandt, Kimmel and Kieso, 2015). The production budget majorly includes the below-given factors: –

1. Opening stock
2. Closing stock
3. Number of units to be produced
4. Buffer stock which is required to be maintained throughout the year

• Cash budget: – For all the divisional budgets, the organisation need the cash due to which they plan for the cash budget. It is required to ensure that at the time of the year it doesn’t run out of the cash because of the poor planning while preparing for the budget (Chen, Weikart and Williams, 2014). This has been found that on the basis of the production and sales budget which include the prediction of the receipts and payments. For the preparation of the budget, the receipts and payments cycle of the customer and suppliers are required to be analysed.
• Capital expenditure budget: – This budget is prepared by the company with the motive to predict the long term investment which will be done by them in the near future. This prediction will help them in raising the funds which will be used by them with the motive to expand the business operations. In the competitive world, every business needs to plan for the cost, time and efforts that they are going to invest in the project with the motive earn the positive returns (Reddy, 2016). The estimation is majorly done by the company for the new plant, purchase and equipment’s that will be required for effective business operations.  
• Budgeted income statement: – This budget is also essential for the estimation of the master budget. The budgeted income statement is prepared on the basis of the above budgets and the format of same has been given below: –

Particulars                    Amount

Budgeted Income          XXX

Less: Budgeted Expenses   (XXX)

Budgeted profitability          XXX

This section of the report includes the discussion about the two important approaches of the budget which includes a top-down and bottom-up approach (Law, 2016).

Elements of Master Budget

The top-down approach of the budget process is a budget that is set without allowing the ultimate budget holder to have the opportunity which contributes in participating in the process of budgeting. In other words, this can be said that in the top-down approach the senior or top-level management of the company prepared the budget on behalf of their different divisions who are located at the different places (Hong, Ling and Moorthy, 2015). This means that the top level management takes the responsibility for preparing the budget the entire budget which will be later on distributed by them to the different departments of the companies. The major benefit of the approach is that it saves the time of the employees by forming the budget of the company. Along with this, the top level management doesn’t blame the lower level management for the wrong decisions that are taken by the company (Y?lmaz, 2018). Though, on the other hand, the approach also has a disadvantage as in this approach the employees will not be able to develop the effective skills of preparing the budget.

The bottom-up approach is a system of the budgeting in which the budget holder maintains the opportunity to participate in the setting of their own budgets. In the present era, there are different companies who make use of the bottom-up approach for managing their business processes. In other words, this can be said that the budget is prepared by the different managers of the departments for their own operations. After preparing the budget, the departments get it approved from the top level management. Thus, the top level management can review the budget and approve it so that they can proceed with their targets and goals (Huikku, Hyvönen and Järvinen, 2017). The major advantage of the approach is that the communication and commitment can easily be done at the executive level because they direct get involve while preparing the budget. Though, on the other hand, this has been found that the major disadvantage of the approach is that the managers and the employee majorly focus on their respective departments due to which their goals remain more of the departmental focused rather than the organisation goals and objectives.  

Basis of comparison	Top-down approach	Bottom-up approach
Targets	In the top-down approach, the targets are given to the executives by the top-level management.	On the other hand, the executives set the direction and define their own mission while preparing the budget (Raudla, 2013).
Execution time	The preparation of the budget by the top level management takes the long execution time as they need to form the master budget which includes the budgets of the different division of the organisation.	Preparation of the budget by the departments generally takes short duration because every department prepares their own budgets.
Status quo	This approach of the master budget generally creates the short term impact on the company’s status quo.	This approach creates a strong impact on the company’s status quo which remains for the long term. This shows that it leaves the tangible and lasting results.
Employees involvement	In the top-down approach, this has been found that the involvement of the employees is less which means that the employees follow the instructions (Kramer and Hartmann, 2014).	The bottom-up approach shows that the involvement of the employees is high while preparing the budgets.
Type	This approach is considered as the undifferentiating and one-way approach.	On the other hand, the bottom-up approach is considered as the specific and analytic approach.
Data	In the top-down approach, the aggregate level data of the metric is supposed to be predicted. Along with this, the senior management of the company considers the historical data while preparing the master budget of the company.	On the other hand, the bottom-up approach is data granular which is limited to the desired level of analysis. Moreover, the managers of the departments will not make use of any historical data. Though, they can make use of the data which is available on the internet (Kelly and Rivenbark, 2014).
Accuracy	In the top-down approach, the budget which is prepared remains more stable and accurate majorly at the aggregate level.	In the approach of the bottom-up approach, high accuracy is maintained at the granular level.
Communication	In the top-down approach of the budget process, there is the possibility of high communication differences.	In the bottom-up approach, there is the presence of better communication among the departments.

From the above discussion the concept of the top-down approach and the bottom-up approach which helps in analysing the approach which remains suitable for the AuStar Gold limited. The company is performing its operations in the Australian market only which means it might have limited departments. Along with this, the departments of the company are limited to the Australian market. The approach which will be suitable for the company is the top-down approach in which the major decisions are taken by the senior and top-level management. The approach is suggested to the company because their operation is critical in which the gaols are essential to be set by the top level management. Along with this, it has been found that budget allocation in the gold manufacturing company is required to be done in an effective manner because the department won’t be able to do in an accurate manner. Thus, this has been found that top-down management is appropriate for the company.

Comparison of Top-down and Bottom-up Approach

The budgeted income statement for the year 2019 for the AuStar Gold limited and the changes related to the sales, costs of goods sold and expenses are reflected in the income statement of the year 2018 (AuStar Gold Limited, 2018). The below given is the budgeted income statement of the company for the year 2019 with the variance between 2018 and 2019.

AuStar Gold Limited (AUL.AX)
	Actual	Budgeted	Variance
Particulars	2018	2019
	$	$
Revenue
Interest Income	4,101.00	4,511.10	-10%
Other Income	477,463.00	525,209.30	-10%
Expenses
Administrative expenses	(213,504.00)	(217,774.08)	-2%
Consultancy and legal expenses	(647,314.00)	(660,260.28)	-2%
Compliance and regulatory expenses	(125,834.00)	(128,350.68)	-2%
Depreciation expense	(83,060.00)	(84,721.20)	-2%
Director and employee related expenses	(153,219.00)	(156,283.38)	-2%
Promotion and communication costs	(7,880.00)	(8,037.60)	-2%
Other expenses	(207,571.00)	(211,722.42)	-2%
Interest expense	(375,843.00)	(383,359.86)	-2%
Impairment of exploration expenditure	–	–
Reversal of impairment	802,255.00	818,300.10	-2%
Share Based Payments	(175,764.00)	–	100%
Loss before income tax expense	(706,170.00)	(502,489.00)	29%
Income tax expense	–	–
Loss after income tax expense	(706,170.00)	(502,489.00)	29%
Other comprehensive income
Total comprehensive loss for the period	(706,170.00)	(502,489.00)	29%

Note: Cost of goods sold is not available due to which the adjustment of the same has not been reflected.

It is assumed that all the expenses are projected to increase by 2%.

The share-based payments cannot be predicted for the year 2019 so it is assumed to be 0.

It is assumed that the reversal of the impairment will also increase by 2% and it is considered an expense in profit or loss for assets.

The comparison of the 2018 and 2019 data reflects that the major changes will appear in the loss of the company. Loss before income tax expense has reflected the variance of the 29% which means that the rise in the sales helps the company to increase the revenue with this there will be a decrease in the loss. It means that loss will be attained by the company but it will be less as comparing it with the year 2019. The major adjustment reflects the variance of 10% and 2% negatively which shows that there is a rise in the amount of revenue as well as the expenses in the budgeted year.

According to the analysis, it has been found that the AuStar Gold Limited Company is making the loss due to which the company should put the efforts which helps them to increase the revenue or sales of the company. The rise in the revenue will help the company in earning the profit with this they can also try to reduce their expenses. The reduction in the expenses of the company is the only way through which they can work to increase the profit and reduce the loss. It is essential for the company to earn the profit because this is the way through which they can get the attention of the maximum customers.

Conclusion 

In the end, it can be concluded that the report is based on the budgeting concept of the accounting due to which it includes the discussion related to the master budget and its elements which is majorly used by the company. Further, the approaches which are used by the company at the budgeting process are discussed. The approaches advantages and disadvantages are reflected which will be faced by the company when they will adopt any of the approaches. Along with this, the differences that are present between both the approaches are discussed which helps in understanding the appropriate budget for the company. Further, the top-down approach has been suggested to the selected ASX Company for the assignment. The selected ASX Company for the report is AuStar Gold Limited; the company is performing the business operations in the market of Australia. In the end, the budgeted income statement of the company is prepared for the year 2019 that is based on the details of 2018. The budgeted income statement is prepared on the different adjustment related to the COGS, sales and expenses of the company.

References 

ASX (2018) Aul Austar Gold Limited [Online]. Available from: https://www.asx.com.au/asx/share-price-research/company/AUL [Accessed on 30^th January 2018]

AuStar Gold Limited (2018) Annual Report 2018 [Online]. Available from: https://www.austargold.com/wp-content/uploads/2018/10/Annual-Report-2018.pdf [Accessed on 30^th January 2018]

AuStar Gold Limited (2018) Company Overview [Online]. Available from: https://www.austargold.com/about-us/company-overview/ [Accessed on 30^th January 2018]

AuStar Gold Limited (2018) Highlights [Online]. Available from: https://www.austargold.com/ [Accessed on 30^th January 2018]

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